Most business owners and self-employed persons spend long hours making plans for, and carrying out the activities required to run their enterprises. It takes a labour of love to develop a successful small business, very often at the expense of the owner’s recreation and rest time.

Dedicated entrepreneurs will pour their hearts and souls into their businesses, hoping to build an entity that will help them to attain personal and financial freedom. Sadly, many start-up enterprises will not survive past their second anniversary, as there is a high failure rate for this group.

Not a get-rich-quick scheme

It takes more than having a great idea and determination to succeed in business, as it’s vital to pay attention to financial details such as costs, cash flow and profit margins. Many entrepreneurs also neglect to take their personal spending needs into consideration when operating their businesses.

Some optimistic persons have the expectation that starting a business will enable them to earn more money right away. They believe that they can make enough to immediately substitute the income from their former jobs with the returns they will receive from their operations.

On the contrary, a start-up enterprise often exhausts most of the owner’s personal resources as it takes some time to turn a profit. If the entrepreneur uses the operating cash flow to pay for his or her personal expenses, it may deplete the business of much-needed working capital.

Can your business afford to pay you?

It’s critical for entrepreneurs to be aware of how much money they need to pay for their personal bills, before starting a business. This will help them to know if their business idea can generate enough profit to finance their lifestyles, or if they will need another source of income at first.

This is especially relevant if there is more than one person who expects the enterprise to supply an income. Many struggling start-ups are dealt a death blow by eager owners who regularly siphon off money from the cash till to take care of personal expenses.

If you are self-employed or own a small business, I encourage you to not only create a budget that outlines the expenses and income for your enterprise, but also to prepare a detailed spending plan for your own bills over the course of a year. Let’s look at the steps involved in making a budget.

Identify all your expenses

Write down all your compulsory monthly expenses such as groceries, utilities, rent or mortgage. Estimate the total annual cost for those occasional bills that must be paid at some point, but don’t come due every month such as cooking gas, car repairs or school fees.

Think about non-essential expenses such as home decorations, entertainment, and gifts. If you’re not sure about how much you really spend on these things, work out a reasonable amount that you think you can afford to pay for these items every month or over the course of a year.

Look back at your past year and see how much you spent on unexpected costs such as home repairs or medical bills. Also list things you need to or would like to spend money on, but may not be able to afford now, such as retirement savings, children’s college fund, or charitable donations.

Fill out the expense checklist

Preparing an accurate budget will allow you to see how much money you need to generate in order to live your desired lifestyle. I have created a personal budget spreadsheet that will help you to properly record your expenses. This budget can be downloaded at www.financiallysmart.org.

The expense checklist section of the budget will allow you to record costs that you incur per day, week and month, or over the course of a year. As a budget is usually done on a monthly basis, you will need to convert all the daily, weekly and annual costs into average monthly amounts.

For daily purchases such as lunch, multiply the cost by the number of days in the month that you buy them. Multiply the cost of weekly expenses such as groceries by four, and divide the annual expenses such as car insurance by 12, and input these average monthly figures.

Record your expenses in the budget

Record all the average monthly expenses into the relevant boxes in the budget section. The Excel spreadsheet will automatically copy these figures over from the expense checklist tab. Then add up all your expenses to determine what your lifestyle really costs you on average, every month.

Although you don’t actually spend on ad hoc annual expenses every month, the budget shows you how much you need to be earning monthly to take care of these bills when they are due. It will also tell you how much extra profit the business needs to generate in order to pay you an income.

If you realise that your monthly expense cost is more than what your business can afford to pay you, don’t try to squeeze the money from your cash flow and cripple your operations. You will have to find other sources of income to cover the shortfall, until your business becomes more profitable.

Copyright © 2014 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, March 20, 2014

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl